Question

You could instead have bought a U.S. government strip that simply promised to pay $1,000 at the end of 5 years. If the 5-year interest rate was 2.35%, how much would investors have been prepared to pay for this strip?

Answer 1

Answer:

The amount which investors have been prepared to pay $1123.153

Explanation:

It is given that government strip promised to pay $1000

So principal amount P = $1000

Time period id given n = 5 years

Rate of interest r = 2.35 %

We have to find the amount after 5 years

Future value is given as

$A=P(1+\frac{r}{100})^n$, here P is principal amount, r is rate of interest and n is time period

So $A=1000\times (1+\frac{2.35}{100})^5$

$A=1000\times 1.0235^5$

$A=1000\times1.123=1123.153$

So the amount which investors have been prepared to pay $1123.153